Small Business

The 4 best financing options for restaurant owners

By: Meredith Wood

Running a restaurant is no easy feat. Between managing staff, ordering ingredients, keeping customers coming back, and managing your restaurant’s marketing presence, your to-do list is likely as long as your menu. And that’s not even factoring in the financial factors you have to consider for the long-term.

Unfortunately, it’s not always easy to get a loan for your restaurant. Conventional lenders aren’t exactly eager to write out checks to companies in risky markets, and the failure rate of new restaurants (23%) certainly doesn’t make matters any easier.

That said, there are still plenty of other financing options for restaurant owners. Here’s when you should look at financing options to take your restaurant to the next level, as well as the options out there to make it happen.

When financing can help your restaurant

Restaurants are inherently expensive businesses to run. You have to purchase ingredients weekly (if not daily), train and retain staff, and make sure that your equipment is running like it should. You don’t have the luxury of taking an oven out of service on a Friday night without throwing off the rhythm of your kitchen, and you won’t have a happy staff if you can’t make payroll due to a cash crunch.

This is where financing can help. There are several purpose-specific loans out there that can help you tackle particular issues, such as purchasing new equipment or paying staff. Other loans, such as a business line of credit, can help you pay for one-off expenses when money is tight.

No matter the purpose, the best time to pursue financing options as a restaurant owner is when you have a set goal in mind, whether you’re looking to fund an expansion, purchase equipment, or advertise on social media. It’s not enough to want the cash to help keep your business afloat—you should know precisely why you want a loan in the first place. From there, you can determine which financing option works best.

Comparing financing options for restaurant owners

The kind of financing you should pursue for your restaurant depends largely on your objectives. Since there are numerous kinds of loans available, your search for the best financing option has to begin with a clear idea of what you’d use the money for. A loan designed to replace aging or malfunctioning equipment is much different than one that gives you working capital. More importantly, these loans all come with varying requirements, such as repayment terms and the amount of collateral required to secure the loan.

1. Equipment loans

Equipment loans are a great financing option for restaurant owners who need to purchase industrial ovens, stovetops, or refrigerators. These big-ticket purchases are hard to pay for outright, which makes a loan much more appealing.

Equipment financing lets business owners purchase new machinery by covering up to 100% of the cost. Best of all, equipment loans are self-collateralizing, which means that the value of the equipment serves as the collateral required to make the loan possible. Instead of putting up money to secure an equipment loan, lenders can merely seize the item if a borrower can no longer make payments. This helps you keep more of your restaurant’s money on the balance sheet for other purchases.

Though equipment financing can be a great choice for big ticket items, it’s important to remember that it is still debt you are taking on. Because you’ll have to pay interest on this loan, you will inevitably pay more for your item than you would had you purchased them outright.

2. Inventory financing

Restaurants require a ton of inventory—much of which is perishable or needs to be resupplied often. Covering food costs can be a restaurant’s biggest expense, which means you might have less money to go toward other goals.

Inventory financing helps cover these kinds of purchases through short- or medium-term loans. Think of inventory financing as a version of equipment loans, except the equipment is in your pantry and fridge. Bear in mind that you’ll only be able to purchase inventory with this loan; if you need financing without these kinds of restrictions, look for broader options such as working capital loans or a line of credit.

On the downside, inventory financing can be difficult to qualify for. Lenders want to be sure that your inventory is easy to sell if you can’t make your payments, and if you struggle to turn it over, chances are a lender will too. Additionally, because inventory financing is considered less secure than traditional loan products, it often comes with higher interest rates and a much longer approval process.

3. Working capital loans

Consider a working capital loan if you need cash without the limitations that come with equipment or inventory financing. This kind of loan gives you the flexibility to borrow for a variety of purposes, or to finance several objectives at the same time.

Working capital loans help restaurateurs pay for day-to-day expenses, and are typically short-term loans that require quick repayment, though Funding Circle offers terms of up to five years. They’re relatively easy to get, and can provide recipients with up to $500,000. Approval turnaround times are short, but interest rates can be high, depending on the lender, so be sure to compare your options.

4. Business lines of credit

A business line of credit is a great financing option for restaurant owners who need to borrow money periodically to cover a variety of expenses. You’ll only pay interest on the amount of money you’ve pulled from the line of credit, and you can draw from the line of credit whenever you need it (as long as you keep paying it back).

Business lines of credit are great for seasonal restaurants, too. You can pull from your line of credit during the drum-up to your busy season, and leave it untouched when business is booming. Or, alternatively, you can draw funds from your line of credit if you have unexpected expenses pop up, but know that you won’t be able to apply for individual loans in time to cover them. The repayment term for a business line of credit depends on your credit history and time in business, but it can sometimes be as long as 20 years.

Factors to consider before applying for financing

As helpful as financing can be, you have to make sure that you’re set up for the best possible terms before you seek out a loan. First, you’ll want to make sure you know the ins and outs of your restaurant’s finances. Most loan applications require you to provide robust, accurate accounting records as part of the application process. This is particularly true for equipment and inventory financing, as well as lines of credit.

Next, you’ll want to do everything you can to get your business credit history in tip top shape. The better you are at paying vendors on time, paying off credit card bills on time, and keeping up with existing loan payments, the easier your application process will be. You can still get financing with a sub-par credit history, but you’ll likely have to pay more in interest or fees to get the funding you seek.

Lastly, you’ll want to know precisely what the purpose of your loan is. This isn’t just an exercise in financial responsibility, either. Your creditors will want detailed information on how you’ll use their money. After all, they’re taking a risk on your business being successful enough to allow you to pay them back.

Finding business financing can be an arduous process for any small business owner, but there are plenty of opportunities out there to get the financing you need to keep the lights on and your customers well fed. The biggest hurdle is knowing where to look, and what your options are. You can save yourself time, frustration, and money by planning ahead.

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Meredith Wood

Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.